The Art of Monetary Policy

By David C. Colander; Dewey Daane | Go to book overview

16

ROBERT SOLOMON


International Coordination of National Economic Policies

Economic interdependence among nations has increased greatly. That, you all know. Economic interdependence is measured in various ways. One important measure is that international trade has increased twice as fast as GDP in the world in the last three decades as our economies have become more open to each other. A second measure of increased interdependence is the enormously greater mobility of capital. The increase in international capital flows has far exceeded the increase in trade. A third measure concerns international financial instruments, whose growth has been even more phenomenal. Examples of international derivative instruments are interest rate swaps and currency swaps. These instruments have developed in the last fifteen years, and their existence has facilitated increased flows of funds across national borders.

Some countries are more open than others. As a general rule, the smaller the country, the more open it is. Because of its size, the United States is still one of the less open countries despite the recent internationalization. On the other hand, the small Netherlands has trade flows that exceed half of its GDP. A small open economy is much more exposed to developments abroad.

A large country like the United States, while less directly vulnerable or exposed to what happens abroad, is, however, subject to an extra impact from the rest of the world precisely because it is so large. I call that extra impact a rebound effect. If the United States goes into a recession, this tends to affect output elsewhere much more so, say, than the Netherlands going into a recession. In turn, that effect on economies outside the United States affects American exports. So while the United States is less open and less directly vulnerable, it is subject to a rebound effect that most other countries are not subject to.

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